Tuesday, April 26, 2011

Corn Seen Topping Wheat on Demand

Corn may become costlier than wheat for the first time since 1984 as demand for livestock feed and ethanol grows, increasing expenses for Tyson Foods Inc. (TSN) and boosting sales at Syngenta AG. (SYNN)

Futures will average a record $8 a bushel in the three months ending Sept. 30, more than the $7.70 a bushel estimated for wheat, said Abah Ofon, an agricultural commodity analyst atStandard Chartered Plc (STAN) in Singapore. Corn will be 11 percent more expensive than wheat in three months, according to Goldman Sachs Group Inc. (GS) Corn in Chicago traded at $7.60, up 2.1 percent, at 3:21 p.m. Singapore time.

Surging costs of corn, an ingredient in livestock and poultry feed, may spur global food prices to rebound to a record, prompting central banks from Beijing to Brasilia to increaseinterest rates. While the gains may raise feed costs for Tyson, the largest U.S. meat processor, they would benefit Syngenta, the world’s biggest agricultural-chemical maker, as farmers seek to protect their crops from pests and diseases.

“There’s only a limited amount of wheat that you can switch into feed at any given time,” according to Ofon, who correctly predicted in January that wheat would trail corn. That will limit wheat’s capacity to benefit from surging corn prices, he said. Wheat was 49 percent costlier than corn on average in the past five years, and last traded at $8.545.

Wheat will decline to $7.75 a bushel in three months while corn may advance to $8.60 a bushel, Goldman Sachs predicted in a report April 21.

Syngenta, Tyson

Sales by Syngenta expanded 14 percent to $4.02 billion in the first quarter from a year ago as farmers in Europe and the U.S. advanced purchases of chemicals aimed at protecting crops against pests and diseases, John Ramsay, chief financial officer, said in a teleconference on April 15.

“We’re already seeing indications that the crop enhancement market for corn and soybeans in the U.S. will be up strongly this year,” Ramsay said.

Tyson and other meat processors have faced higher feed costs as corn and soybean prices advanced to their highest levels since 2008. Corn and soybean meal represent 42 percent of Tyson’s cost of raising chicken, which made up 34 percent of its sales in 2010, according to the company.

Corn may advance to $8 a bushel, said Luke Mathews, a commodity strategist atCommonwealth Bank of Australia, while Alex Bos, an analyst at Macquarie Group Ltd., said futures may climb as high as $10 a bushel if U.S. farmers plant less than the government estimates.

Corn, Ethanol

Global stockpiles will drop for a third year to 111 million metric tons in 2011-2012, or about 13 percent of consumption, the International Grains Council said on April 20. That would be the smallest ratio of inventory to consumption since 1974, according to U.S. Department of Agriculture data.

Increasing demand for corn in China, the world’s second- largest user, may force the nation to end exports of the grain and rely on overseas suppliers, Jay O’Neil, an adviser at the U.S. Grains Council, said in Singapore today.

“As we go into 2012, there’ll be no more exports from China and very possibly imports,” O’Neil said at a conference.

China was estimated by the USDA to ship 100,000 tons in the 2010-2011 marketing year, down from 151,000 tons a year earlier. The Asian nation’s annual corn exports have plunged six times since the marketing year ended 2003, when shipments were at a record 15.2 million tons, according to USDA data.

Food Prices

An estimate of 2 million tons of corn imports by China “is rational,” as the country’s production struggles to keep pace with demand, John Baize, who runs international agricultural trade and policy consulting company John Baize and Associates said at a conference in Singapore.

Baize’s estimate for China’s corn imports compares with the USDA forecast of 1.5 million tons.

While the United Nations Food & Agriculture Organization’s Food Price Index dropped from its record in March, harvests may not increase enough to rebuild global stockpiles to “safe levels” as demand for food, livestock feed and biofuel increase, said Concepcion Calpe, an economist at the FAO, on April 7.

About 7 percent of the U.S. corn crop was planted as of April 17, down from 16 percent a year earlier, according to the USDA. At least a third of the crop should be planted by May 1 or yield potential may be diminished, said Greg Grow, the director of agribusiness for Archer Financial Services Inc. in Chicago.

Expanding Acreage

Acreage in the U.S., the world’s largest grower and exporter, will expand 4.5 percent to 92.178 million acres (37.3 million hectares) this year, the second-largest since 1944, the USDA estimates.

Corn use in ethanol production will jump 35 percent to 5 billion bushels this season from two years ago, the USDA said April 8. A by-product of processing is dried distillers’ grain with solubles, a competitor of feed wheat.

Increasing supplies of so-called DDGS will provide poultry and livestock farmers with a cheaper alternative, discouraging them from switching to wheat, according to Simon Clancy, manager for export brokerage at FCStone Australia Pty.

The last time the most-active corn futures contract in Chicago closed at a premium to wheat was on June 18, 1984, according to data compiled by Bloomberg.

BNN: FED Lookahead and the US Dollar

The Dollar, Gold and Silver: A 20-Year Perspective

I received several emails requesting a similar chart for Silver. Here, courtesy of myStockcharts.com subscription (which gives me access to 20 years of data) is the same overlay with the addition of Silver.

Over the past nine years Gold and Silver have had approximately the same gain, but the paths have been rather different, with Gold the more orderly of the two. Guessing the trajectory of precious metals is just that — a guess. There are so many significant unknowns: the end of QE2, the possible advent of a QE3, a political showdown over the debt ceiling, a potential inflationary spike, EU sovereign debt issues, to mention some of the most obvious.

The accelerating contour of Silver over the past several months does have bit of a bubble look. But we're living in highly uncertain times, and the speed and depth of the Silver correction, when it inevitably comes, may or may not create a peak that clearly passes as a bubble.

2 stocks for pain at the pump (TSO, WNR)

Buying gas sucks. Here are 2 stocks that could offset your pain at the pump: Western Refining, Inc. (NYSE:WNR) and Tesoro Corporation (NYSE:TSO).

Even in the face of higher crude acquisition costs, the EIA predicts refiners’ margins will be significantly higher this year. Last year, refiners’ margins averaged $0.35 a gallon. This year, the EIA predicts they’ll average $0.53 a gallon, or over 51 percent higher. Diesel margins are expected to average $0.60 a gallon this year versus $0.40 a gallon last year.

Let's get right into these to stocks:

Tesoro Corporation (NYSE:TSO)

Over the past 12 months Tesoro Corp (TSO) shares have traded between $10.4 and its 52-week high of $28.74. Tesoro Corp shares are now trading with a Forward P/E Ratio of 10.28.

Western Refining, Inc. (NYSE:WNR)

Over the past 12 months Western Refining Inc (WNR) shares have traded between $4.01 and its 52-week high of $19.5. Western Refining Inc shares are now trading with a Forward P/E Ratio of 9.89.

JIM ROGERS: Short Treasuries And Buy Commodities, Especially Silver

Jim Rogers reiterated his plan to short U.S. Treasuries in an interview with The Economic Times:

I plan to sell short US government bonds sometime in the next few weeks, months. Interest rates all over the world are going to go higher. We have inflation, staggering debt problems and currency problems facing us. So interest rates are going to go higher.

Rogers said the treasury market will collapse when QE2 ends on June 30. Soon enough Rogers says the Fed will return with QE3.

Rogers says he is invested in all agricultural commodities through the Rogers Agricultural Index. Other commodities he likes are natural gas and silver:

I prefer to look at the things that are still depressed. Natural gas is depressed compared to oil, silver is depressed compared to gold. I would rather look at the things within those sectors to see what are the things that are still depressed and see if maybe that is where we should be putting money.

That's right, silver is just getting started:

Silver has certainly gone up a lot in the last 9-10 months. There is no question about that, but remember, silver is still 10% below where it was 31 years ago. I bet you do not know many things that are 10% below where they were 31 years ago.

Silver has been going up but on a historic basis, it is still very depressed. Oil is up a lot in the last year or two, but remember the known reserves of oil are on a decline. People can moan all they want about. The fact is that the price of oil is up, but where is the oil? If somebody finds a lot of oil, prices are going to go much-much higher.

Silver shines for Alexco Resource (AXU)

Alexco Resource (AXU) shows every sign of running higher along with the precious metal.

The Vancouver-based company was founded in 2005 by a management team with decades of experience in the mining industry.

With a market cap of $520 million, the stock has traded on the Toronto exchange since 2006 and on the AMEX exchange since 2007.

All indications are that Alexco will turn profitable in the fiscal year that ends in June, which should help green light the stock in many investors' minds.

The company's exploration has thus far been centered on its holdings in the Yukon's Keno Hill Silver District where it began to accumulate land in 2006.

Rated at 40 ounces per ton, Keno Hill is historically one of the richest silver production districts in the world.

From 1941 to 1989, the Keno Hill district delivered more than 217 million ounces of silver; production was halted in 1989 because of rising costs and low metals prices.

Commercial production began at the company's Bellekeno mine on January 1, and the mine appears ready to release its wealth to today's improved, more cost-effective technologies.

The company's production plans indicate that Alexco Resource will deliver 2.8 million ounces of silver in 2011. It projects this will increase to 5 million ounces by 2013, and to 7 to 10 million ounces by 2015.

The Bellekeno mine produces two metals typically found with silver -- lead and zinc. As gold and silver have drawn most of the attention due to rising prices, other less glamorous non-precious metals, including lead and zinc, also have marched higher.

In addition to its silver lode, Alexco projects that it will produce 18 million pounds of lead and 8 million pounds of zinc from the mine this year.

At spot market prices of around $1.10 and $1.25 per pound, respectively, production of those metals should pay for all mining costs.

And therefore, the silver coming up becomes 'free' -- produced at a negative cash cost. While lead and zinc pay the freight, the silver is all profit.

If Alexco Resource reaches 7 million ounces of silver output a year, the company will have a tremendous cash flow.

Interestingly, Alexco Resource also has another mining-related business - restoring mine sites and other brownfields environmental eyesores by returning the land and water to the way they were pre-mining.

So it cleans up after itself, and even cleans up any messes that other less conscientious outfits have left behind.

The company is sitting on $46.1 million in cash, thanks to a refinancing move made in 2010, and it also has no long-term debt on its books.

It's a Good Time to Consider Insuring Your Portfolio With the VIX: VXX, VXZ

Talking about catastrophe is never fun, but avoiding the conversation can leave you unprepared and vulnerable. Worse it can lead to rash decision making if catastrophic events do occur. Preparing for a potential catastrophe is generally most successfully done when we are calm and clear headed. Furthermore, it is typically a good idea to purchase insurance during these placid periods in order to hedge ourselves against potential future storms. In this instance the future storms that loom over the US stock market and the US dollar--at least in the short term--are the end of QE2 this Summer, and the potential outcomes of the debt ceiling debate. The object of this article is not to discuss political ideology, but rather to discuss the potential negative outcomes from these two events, and a possible way to hedge a market collapse using VIX call options, or VIX ETNs like the iPath S&P 500 VIX Short-Term Futures ETN (VXX) and iPath S&P 500 VIX Mid-Term Futures ETN (VXZ).

The Volatility Index "VIX"

In a 2008 research paper written by VIX creator Robert E. Whaley, the author writes that "the VIX is a forward-looking index of the expected return volatility of the S&P 500 (SPY) index over the next 30 days. It is implied from the prices of S&P 500 index options, which are predominantly used by the market as a means of insuring the value of their stock portfolio." Thus the VIX essentially analyzes the difference between call and put options on the S&P 500 that expire in the next 30 days. For a thorough discussion of the VIX pricing methodology please see the Chicago Board of Options Exchange "CBOE" VIX white paper (pdf).

Simply put, a call option is a contract between two parties where the purchaser believes the underlying investment will go up in time, and the writer of the contract typically believes the price of the underlying asset will go down or stay even. The contract premium is what the call writer collects from the call buyer, and this premium varies depending on a number of different factors. In general a call buyer will make money if the price of the underlying asset goes above the agreed upon strike price during the period of the options call contract. Conversely a buyer of a put contract is making a bet that a stock or the underlying asset will go down over time, and the put writer is collecting a premium for the bet. Also the put writer is typically betting that the stock won't go down; however it should be noted that there are certainly exceptions to these generalization.

These call and put contracts get much more complicated than my simple explanation, but it's important to understand the relationship between the put and call option contracts as they relate to the VIX. For instance, in a bull market the VIX will typically be very low, as there are more bets that stocks will increase in value over time, and in a bear market the exact opposite is true. Below is a chart put together by Dr. Whaley that looks at the relationship of the VIX to the S&P 500 from 1986 to 2008. The Blue line represents the S&P 500, and the red line represents the VIX.

History of the VIX: 1986 to October 2008

It should also be noted that the VIX is intimately tied to liquidity. In a robust market with many participants liquidity is high as it is easy to find buyers and sellers. However, in times of panic a market becomes temporarily illiquid as the number of sellers far outweigh the number of buyers. This dislocation between buyers and sellers causes large spreads to occur between a seller's ask price, and a buyer's bid. The result is a large drop in value as desperate sellers capitulate and sell to the few buyers left in the market. This short period of illiquidity results in a spike in the price of put options as traders look to short stocks, and a spike in the opposite direction for call options as traders fear taking on bullish risk. The end result is a turbocharged VIX that can make a large percentage move in a day.

In the past 15 years several instances of large VIX jumps have occurred. The Asian Currency Crisis of 1997 and 1998, the Russian Default Crisis of 1999, the September 11th terrorist attacks, and the Lehman Default of 2008 are all prime examples of large percentage jumps in the VIX. As you can see the VIX is highly susceptible to black swan events and sovereign defaults. The chart below was created by Artemis Capital LLC to look at the impact of sovereign currency crises on the VIX. The orange area looks at the Mexican Peso crisis, the Yellow Area reviews the Asian currency crisis, and the red area is the Russian Ruble default.

(Click charts to enlarge)Source: artemiscm.com

The chart below is a 20 year history of the VIX. The first green circle corresponds to the Mexican Peso Crisis, the second circle is the Asian and Russian crises, the third circle indicates the September 11th attacks and the 2002-2003 recession that followed. The last circle indicates the 2007 housing crisis and Lehman Bankruptcy. As you can see in periods of market distress, particularly during sovereign credit crises, the VIX has a very large and punctuated percentage gain.

20 Year History of the VIXSource: oracle.co.uk

Why the VIX is a Good Investment Now

According to Dr. Whaley's 2008 paper, the 22 year average value for the VIX is 18.88. Typically as a rule of thumb a VIX reading below 10 indicates a very placid market with little fear and good fundamentals. A rating above 20 indicates a tepid market with some risk, a rating above 30 is generally indicative of concern over fundamentals, and a rating above 40 illustrates panic in the market place. As of Friday's market close on 4/22/2011, the VIX stood at 14.69.

The low VIX reading for the market is due to several factors, but mainly is a function of Quantitative Easing conducted by the Federal Reserve. As mentioned earlier, the VIX generally has an inverse relationship with liquidity. If liquidity remains high then the VIX will generally go down. However, when liquidity is threatened, the VIX as well as the stock market will typically spasm simultaneously in opposite directions. Knowing this the Federal Reserve has attempted to induce risk investments in equities by keeping interest rates low, and by purchasing asset classes that other investors may not want like mortgage backed securities "MBS" and U.S Bonds.

The impact of the Federal Reserve's efforts has allowed institutional investors to borrow money at low rates, and seek higher yields in other asset classes like commodities, equities, and options. These efforts have in large part helped spur the current bull market in equities and commodities. However, once the Federal Reserve stops it's QE2 program, liquidity in the markets will start to dry up as there will be fewer buyers propping up the bond market. The impact of this will potentially force an interest rate rise as sovereign nations and institutional investors demand a higher return on their investment in US bonds.

In addition to the problems raised by the end of QE2, the US needs to make a decision on whether or not to raise the country's debt ceiling. If the US. does decide to raise the debt ceiling the likely short term results could be a weaker US dollar, an increase in commodity prices, and a potential interest rate hike. If the US decides to delay or vote down the proposal to raise the debt ceiling the result would most likely be very bearish. Possible consequences of a failure to raise the debt ceiling include: a wave of government sector firings, sovereign nations like China and Japan dumping large amounts of US. debt, a large interest rate spike as sovereign nations would value our debt at a much lower credit rating, a short spike in commodity prices particularly gold, and a slow down in the American economy as businesses may have difficulty finding credit. Furthermore, the likely result of a delay or a refusal to raise the debt ceiling would be a quick and immediate spike in the VIX as traders become bearish on the US. equity market.

The VIX As Life Insurance for Your Portfolio

The confluence of the above factors makes the VIX an attractive purchase at these levels. The factors previously discussed are: the low VIX price relative to it's historical average, the end of QE2, and possible market turbulence as the result of the debate over the US debt ceiling. For those with substantial equity positions, it may be a good idea to consider the VIX as an insurance product that can protect your portfolio against potential financial disasters. Furthermore, the price of the VIX insurance premium is quite low relative to it's historical average, and the chance for near term market turbulence is in the author's opinion quite high.

As an analogy, view your portfolio as if it was a young 35 year old with no real health complications. The price of purchasing life insurance for your portfolio in this instance would be quite low because there are few perceived risks at the moment. However, if the market goes down and liquidity dry's up, then your portfolio may look more like a 70 year old chain-smoker. The cost of insuring this portfolio would be quite high relative to the other portfolio. While you may risk losing your insurance premium if the market remains bullish, at least you'll be getting a historically low premium rate.

How to Play the VIX

Institutional investors, and investors with large portfolios can purchase call option contracts from the Chicago Board of Options Exchange (CBOE) with varying maturity dates. The contracts are European style meaning that the option can only be exercised at the maturity date. Investors who prefer not to trade options can invest in Barclay's short term VIX ETN (VXX) or medium term VIX ETN (VXZ). Whether an investor decides to invest in CBOE VIX call options or ETNs it's recommended that the investor only take a small position in these securities since they are simply insurance against your portfolio losing value.

If investors do purchase the VXX or VXZ, it may be a good idea to consider placing a limit order at a reasonable return as the VIX can sometimes spike quite quickly, and only a nimble trader would be able to sell out at a large profit. Furthermore, investors are encouraged to consider the risks of purchasing VIX call options, or the Barclay's VXX and VXZ ETNs. Particular attention should be given to the fact that the VXX and VXZ methodology often create a contango situation that can lose an investor a considerable amount of money over time. For this reason, it is recommended that investors who choose to invest in the VXX or VXZ have a short term perspective of 3 months or less so that only a small amount of principle will be lost if the stock and bond markets remain bullish.


In summary, investors should consider buying insurance for their stock portfolio through either VIX call options, or a VIX ETN. As discussed in the article the VIX may provide a hedge to an investor's portfolio against potential near term financial headwinds. The US debt limit debate, and the end of QE2 present two such headwinds that may create turbulence in the markets. Additionally, the low cost of purchasing a VIX insurance premium means that this investment has relatively little downside risk. As always investors are encouraged to do their own due diligence, and to consider their risk tolerance before taking a position in the VIX.

Intel and Microsoft Can Grow Despite Huge Size Read more: Intel and Microsoft Can Grow Despite Huge Size : MSFT, INTC

The business cycle in the technology sector moves very fast. What once was new soon becomes old. Products get commoditized in an instant, and companies find their markets saturated quickly, slowing their growth to a much lower rate.

That’s what has happened to Microsoft (MSFT) and Intel (INTC). Yet both companies still have solid, if not always meteoric, earnings growth. And they have instituted healthy dividends, turning themselves virtually into utilities. All this can make them an attractive investment play.


The world’s largest chip maker had a stellar first quarter. Net income soared 29 percent from a year earlier to $3.16 billion from $2.44 billion, beating analysts’ estimates by more than 20 percent. Sales surged 25 percent to $12.8 billion.

The smartphone and tablet craze boosted demand for Intel chips that help power the devices. And while demand for new personal computers is sluggish, demand for upgrades isn't, allowing Intel to benefit from its 80 percent share of the microprocessor market.

The company also is reaping gains from demand for servers that offer cloud computing, which provide all of a computer’s services over the Internet. “The server business exceeded our expectations,” Intel Chief Financial Officer Stacy Smith said in a statement.

Twenty-one of the 30 analysts surveyed by Daily Finance have a buy or outperform rating on Intel.


The world’s largest software producer also beat analysts’ earnings estimates in its latest report. Profit totaled $6.63 billion in the quarter ended Dec. 31, topping estimates by 13 cents. Sales climbed 4.9 percent to $20 billion, also exceeding expectations.

Demand is strong for Windows 7. "Nearly 90 percent of enterprise companies worldwide have already started their formal migrations to Windows 7," Microsoft Chief Financial Officer Peter Klein said on a conference call. Microsoft has sold more than 300 million copies of the product.

The success of Microsoft’s Xbox 360 consoles sent sales in the entertainment-and-devices division soaring by 55 percent.

And the outlook for the future is solid. “We expect revenues to rise 13 percent in fiscal 2011, ending June 30, following 6.9 percent growth in fiscal 2010,” writes Standard & Poor’s analyst Jim Yin.

Volatile silver cuts early gain toward 1980 record

Silver surged as much as 8 percent on Monday before pulling back sharply when a failure to pierce the all time high from 1980 unleashed a wave of technical selling amid record volume in U.S. futures.

After briefly dipping into negative territory midmorning as speculators sharply took profits near the $50 psychological level, silver later found its footing again. The metal traded largely flat, steadying at just below $47 after the CME Group raised the maintenance margins of silver futures by 9.2 percent.

Gold prices also recoiled from early gains of nearly 1 percent after touching a seventh successive record high with volatility spiking to its highest since November.

The whipsaw in silver prices amid otherwise thin trading market conditions was a stark reminder of the volatile nature of this year's best-performing major commodity, which has gained about 150 percent since the U.S. Federal Reserve signaled new easing measures last August. Silver has risen for nine straight days, matching a record winning streak from 2008.

"Silver has transformed itself from an inflation hedge to a speculation tool," said Hakan Kaya, commodities portfolio manager at Neuberger Berman, which manages about $190 billion client assets. "At current prices, we find it highly overvalued with no fundamental reasons backing it up."

While often overshadowed by gold, the smaller silver market has handily outpaced the yellow metal's 25 percent gains over the same period. Prices look set to challenge the record $49.48 an ounce from three decades ago when Texan brothers William Hebert and Nelson Bunker Hunt sought to corner the market.

Spot silver was up 1.4 percent at $47.34 an ounce by 3:39 p.m. EDT (1939 GMT), sharply below a session high of $49.31.

Spot gold was at $1,509,60 an ounce, up 0.4 percent, well off an a record high of $1,518.10 set earlier in the session, in tandem with silver's reversal. U.S. June gold futures settled up $5.30 at $1,509.10 an ounce, in a range from $1,502.20 to $1,1519.20.


U.S. May silver futures jumped as much as over 8 percent to a intraday high of $49.82 an ounce, just about 50 cents off its all-time peak for futures at $50.35 hit on January 18, 1980. May settled up $47.149 an ounce, up $1.09.

U.S. silver volume surged to a record high, topping 300,000 lots, more than doubled gold's turnover, preliminary Reuters data showed.

Despite record futures volume, silver's initial rally was not backed by active trade prior to its sell-off, with markets in Britain, Canada and Australia shut due to the Easter Monday holiday.

Analysts said silver's rally was backed by new source of demand from solar panel manufacturers in addition to traditional strongholds including electronics and photography amid a recovering economy. However, extreme price fluctuations could hurt demand.

"We are constantly researching and developing production methods to minimize key resource inputs, including silver, to drive down the costs of production," said Stuart Wenham, chief technology officer of Suntech Power Holdings Co Ltd, the world's top solar panel maker.

Wenham said that the recent rise of silver prices with increasing volatility highlights the importance of the company's R&D initiatives.


COMEX option floor trader Dominic Cognata said that volatility in silver options "went through the moon" ahead of Tuesday's May option expiration and Wednesday's conclusion of the Fed's two-day policy-setting meeting.

Active option trade in iShares Silver Trust, the world's largest silver-backed exchange-traded fund, also suggests some traders maybe betting on a sharp reversal after a huge rally in silver prices.

A key technical indicator, silver's 14-day relative strength index, is warning of a further correction in the silver market after the precious metal got within $1 of its all-time high on Monday and traded at levels not seen in more than 30 years.

On gold, the CBOE gold volatility index, a gauge of bullion investor anxiety, surged to about 17 percent, its biggest one-day gain since November last year.

James Dailey, portfolio manager of the TEAM Asset Strategy Fund said that silver's technical charts are showing signs of exhaustion, with strong volume recorded at its sharply higher open and the subsequent reversal.

In platinum group metals, platinum was up 0.6 percent at $1,821 an ounce, while palladium eased 0.7 percent at $760.47 an ounce.